In the wake of one bold housing crash prediction, brokers are questioning the methodology one analyst used to arrive at his dire conclusion.
“[House price to household income] is a perfectly horrible predictor of underlying strength in a market if you strip out interest rates (i.e., time value of money itself),” Aaron Vaillancourt of Mortgage Architects
wrote on MortgageBrokerNews.ca. “As others have pointed out, carrying capacity is a much more important factor for affordability, since ‘payment’ is the vehicle for how much a buyer ‘pays’.
“Even more important than capacity is having a job itself,” Vaillancourt continued. “The unemployment rate and associated labour force participation rate are unquestionably the primary drivers of credit creation.”
Vaillancourt’s comment was in response to a recent prediction that the Canadian housing market is due for a severe crash, made by Richardson GMP Portfolio Manager Hilliard Macbeth.
“The best measure of affordability is the ratio of house price to household income; prior to 2000, this ratio seldom rose about three times, fluctuating between two and three for decades. In the U.S., just prior to their crash, that ratio hit 4.4 times and then dropped down to about 2.5 and now is at three,” MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash told our sister publication, CREW. “In Canada the average ratio today is about five times, with Vancouver over 10 times and Toronto about six times. To get back to three times the average ratio would have to drop about 40 per cent, from five to three, or in the case of Toronto 50 per cent from six to three.”
Many have criticized Macbeth’s position as self-serving, pointing to his position as a financial advisor.
However, Macbeth boasts that his first book, Investment Traps and How to Avoid Them
, predicted the early 2000s dot-com bubble crash.